Passporting and Brexit’s Implications for Cross-Border Activity

Of all EU legislation currently in force, one of the most important from a banking perspective is the concept outlined in the MiFID known as “passporting.” Passporting, one of the central pillars of the EU financial services regime, gives banks in a member state the ability to carry on business and sell services throughout Europe without obtaining a license or similar in each individual country.

Currently, many financial institutions established in the UK rely heavily on passporting rights to operate in the EU – this includes British financial institutions, of course, but also EU institutions headquartered in the UK and non-European Economic Area (EEA) institutions which have chosen the UK as a base for EU operations. When the UK exits the EEA, financial institutions established in the UK would lose their passporting rights unless an alternative trade arrangement for access is negotiated.

Loss of passporting rights could potentially see exports of financial services to the EU halved to around £10 billion.

Regulators will need to find a solution to continued passporting arrangements between the UK and the EU. Currently, financial institutions with locations across European borders enjoy relative ease of operation and transference of personnel and funds. We may see this change, something which will affect institutions with EU members working in the UK or vice versa. The ability of UK-based institutions to export financial services into the EU will be dependent on a favorable outcome of these passporting arrangements.

In one scenario, UK-based financial institutions would need to apply for authorization in each EEA member state individually. Individual trade agreements and having to abide to different international laws is possible but may prove challenging, and may result in increased regulatory compliance. This could have a detrimental impact on a firm’s decision to stay in the UK.

In a second scenario, UK-based institutions (including the non-EEA banks which have chosen London as their EU foothold to gain passporting rights) will need to transfer a portion of the operations for which they will seek passporting to an EEA member state. Many firms already have distribution or servicing hubs within the EU, such as in Luxembourg or Dublin. These take advantage of local knowledge and expertise, or deal with indirect obstacles to trade within the single market for services, such as tax. Again, Switzerland provides an example for how UK firms may continue to export financial services to the EU. Firms could adopt the Swiss Banking model by operating through subsidiaries in lieu of “passporting” rights.

Over the longer term, there could be a positive opportunity to compensate any potential loss by concluding bilateral trade agreements with emerging financial centers, such as Hong Kong and Singapore, with which the UK has considerable historical and cultural ties. This could potentially result in a “best of both worlds” scenario, where less favorable single market initiatives are switched off.

Regardless, we anticipate that due to the increased complexity of doing business, many financial services businesses may take a hard look at their footprint to re-determine if all their cross border operations are required.

For everything you want to know about Brexit’s impact on the Financial Services industry, click here.

Jill Jacques is the Global Financial Services Lead with North Highland. She has more than 18 years of experience in the financial services industry, in both the retail and institutional lines of business. She leads a diverse group of consultants, helping retail and institutional clients creatively solve the complex problems facing the financial services industry.